Avro India Limited (NSE: AVROIND) shares have experienced strong momentum: does this require a more in-depth study of its financial outlook?
Avro India (NSE: AVROIND) has had an excellent performance in the equity market with a significant 81% share increase in the past three months. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we will be paying close attention to the ROE of Avro India today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Avro India
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Avro India is:
12% = â¹ 18m â¹ 151m (Based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. This means that for every 1 of equity, the company generated â¹ 0.12 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Avro India profit growth and 12% ROE
At first glance, Avro India’s ROE isn’t much to say. However, given that the company’s ROE is similar to the industry average ROE of 11%, we can think about it. In particular, the exceptional 34% net income growth seen by Avro India over the past five years is quite remarkable. Considering the fact that the ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the company. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then compared the net income growth of Avro India with the industry and we are delighted to see that the growth figure of the company is higher than that of the industry which has a growth rate of 5, 8% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether Avro India is trading high P / E or low P / E, relative to its industry.
Is Avro India Efficiently Using Its Retained Earnings?
Since Avro India does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.
Overall, we think Avro India certainly has some positive factors to consider. With a high reinvestment rate, but low ROE, the company has managed to see considerable growth in profits. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To know the 2 risks we have identified for Avro India, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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